On Kohl’s second-quarter analyst call, Tom Kingsbury, CEO, said the overall active category remained “soft” for the retailer in the second quarter, but outdoor and golf trends were encouraging, with Nike, Under Armour and Eddie Bauer showing strength.

“Active also remains an important piece of our business,” Kingsbury told analysts. “While trends in the overall active space remain soft, we are focused on building on our recent success in outdoor and golf apparel while also working with our national brand partners to bring in newness. In the second quarter, we were pleased with the sales trends in our Eddie Bauer offering in outdoor, as well as in Nike and Under Armour footwear.”

The active category underperformed for Kohl’s last year as consumers shifted to more career and dressier looks with the return to in-office work and socializing and away from activewear and relaxed styling seen in the earlier stages of the pandemic.

In February, on Kohl’s fourth-quarter call, Kingsbury, who took over as CEO in February, announced that Kohl’s planned to slightly deemphasize the activewear category after expanding it for years to make room for more casual and career looks and to explore newer opportunities in home and gifting.

On Kohl’s first-quarter analyst call, Kingsbury said, “We’re still committed to the active business, but we’re looking for a rebalance.”

Overall, Kohl’s reported earnings and sales in the second quarter were lower than year-ago levels, but sales were in line with plan, and profits exceeded expectations with the help of tight expense and inventory controls. Kohl’s maintained the outlook for the yea.

Kingsbury said Kohl’s quarterly earnings aligned with internal expectations as progress continues in its turnaround efforts. He said, “We are confident our strategies will drive sales and earnings performance. It will take some time for the full impact of our efforts to be realized; however, our objective is to show incremental improvement in the back half of the year with even more benefit in 2024 and beyond.”

Second-Quarter Earnings Top Analyst Targets 
In the quarter ended July 29, sales fell 4.8 percent year-over-year, to $3.7 billion, matching Wall Street’s consensus estimate. Comparable sales were down 5.0 percent. In-store sales outperformed the total company with flat sales to last year, driven primarily by strong sales growth at Sephora in-store shops. Sales in the home category showed the most improvement versus Q1.

Digital sales remained pressure in Q2, down 17 percent to last year. Online penetration was at 25 percent of sales, still up versus pre-pandemic levels. Jill Timm, CFO, said, “We are seeing customers shift back towards stores, and sales were impacted as expected by the elimination of online-only promotions as we work to simplify our value strategies.”

From a product perspective, national brands outperformed private brands in the quarter. Top-performing national brands included Nike, Under Armour, Hager, Izod, Hurley, and Eddie Bauer, while top-performing private brands were Apartment 9, LC Lauren Conrad and Jumping Beans. Footwear showed trend improvement, partly driven by increased Nike and Under Armour sales.

Accessories was the best performing category, up 25 percent to last year, driven by Sephora in-store shops. Supported by nearly 200 Sephora in-store shops opening in the quarter, total beauty sales increased nearly 90 percent year-over-year. Same-store sales in beauty gained greater than 20 percent in the Sephora shops opened in 2021 and 2022. The increase in beauty sales was partially offset by lower sales in jewelry that were deemphasized. 

Other revenue, primarily Kohl’s credit business, declined 3 percent in the quarter, an improvement in trend versus Q1.

Q2 gross margin was 39.0 percent, a decline of 61 basis points to last year, driven by product cost inflation and higher shrink, offset partially by lower freight expense and digital-related cost of shipping. Year-to-date, gross margin was 39 percent, flat to last year.

SG&A expenses increased slightly, up 1.6 percent year-over-year to $1.3 billion, primarily due to higher store expenses driven by Sephora openings, wage pressure, and store experience investments that were partially offset by lower marketing and distribution costs. As a percent of revenue, SG&A expenses increased 208 basis points to 33.5 percent.

Operating income declined 38.7 percent to $163 million. Operating margins were reduced 233 basis points year over year to 4.2 percent, ahead of plan. Net income fell 59.4 percent to $58 million, or 52 cents a share, surpassing Wall Street’s consensus estimate of 24 cents.

Inventory at the quarter’s end was $3.5 billion, a decrease of 14 percent year-over-year, exceeding Kohl’s goal of planning inventory down mid-single digits.

Four Strategic Priorities
Kingsbury provided an update on Kohl’s four strategic priorities:

  • enhancing customer experience,
  • accelerating and simplifying its value strategies,
  • managing inventory and expenses with discipline, and
  • further strengthening its balance sheet.

On enhancing the customer experience, Kingsbury listed Sephora, gifting, impulse, pet, and home decor as untapped growth drivers.

Sephora’s in-store shops continue to resonate with customers while bringing in new customers. Kingsbury said, “The performance is exceeding our expectations, and we are driving considerable beauty share gains.” Kohl’s will complete the rollout of its 850 2,500-square-foot shops this month and will open smaller Sephora shops to the rest of the chain.

Existing offerings such as housewares and cookware helped support the home category’s sequential improvement in the second quarter with new home items, home décor and pet offerings added to support a larger presence for the holidays. 

To improve its position in gifting, Kohl’s is removing registers to open up aisle space to create seasonal gifting destination areas. Those areas currently feature back-to-school items, including backpacks and dorm products. Beauty, wellness, toys, and snacks are being added to key areas in-store to support impulse purchases.

Beyond the efforts to build on recent successes in outdoor and golf apparel, Kohl’s will focus on “polished casual and dressy offerings” that are currently resonating with customers across women’s, men’s, and children’s. Kohl’s has seen strong results in men’s suiting, dress shirts and dress pants.

To amplify its value messaging, Kohl’s has reduced general promotions and eliminated online-only offers in favor of more targeted offers and clearance events on a more regular basis. Also being tested are “key-value items,” representing more competitive and consistent pricing on select merchandise within its private apparel and home brands.

“This is a continuation of our efforts to simplify our pricing. We’re also evolving our marketing message with greater clarity around strong price points in our in-store graphics and our digital and broadcast ads,” said Kingsbury. “While it remains early, we are very encouraged with the response we are seeing from customers. Our key value items are performing positively; this is a compelling opportunity for our business over the long-term, and based on initial results, we are planning to thoughtfully scale it in 2024.”

Kingsbury said the inventory improvement enabled Kohl’s to operate with greater open-to-buy flexibility. “As we implement new planning and allocation processes, we’re becoming more responsive to the customer’s demand, operating with additional open-to-buy to chase trends and minimize risk, maintaining better in-stock levels in core basics, and improving inventory flow from our distribution centers to the selling floor. Looking to the fall season, we feel good about our current inventory levels and our ability to continue to manage inventory with discipline,” said Kingsbury.

On expenses, the CEO said Kohl’s has set a goal of lowering its marketing spend ratio to 4 percent and is introducing self-checkout kiosks in stores and automation to warehouses to lower costs. Kingsbury further said Kohl’s generated solid cash flow in the quarter, allowing the chain to reduce its revolver borrowings by $205 million, and the company remains committed to its long-term objective of managing to a 2.5 times leverage level.

Kingsbury concluded in his formal comments, “I am pleased with our second-quarter earnings. I’m confident that the work we have underway is positioning Kohl’s for long-term success. Our organization is operating with strong discipline and efficiency, and many of our growth-driving initiatives are just beginning to take shape. As it relates to our more recent trends, our August-to-date sales are off to a good start, driven by back-to-school and our fall seasonal items.”

Guidance 
Kohl’s reiterated its outlook for the year that calls for:

  • Sales to decrease in the range of 2 percent to 4 percent;
  • Operating margin to be approximately 4.0 percent compared to 1.4 percent in 2022; and
  • Pro-forma EPS to range from $2.10 to $2.70, excluding any non-recurring charges, compared to a loss of 15 cents in 2022.

 Photo courtesy Kohl’s